Payments and settlements between PSUs and government departments that constitute a large market for the micro and small enterprises-MSEs have been very inefficient and these have been responsible for the creation of the NPAs in MSMEs

Micro, Small and Medium Enterprises (MSME) occupy an important space in the Indian economy both from the points of growth and employment. Still they suffer from serious disabilities due to their excessive dependence on debt markets. The window of opportunity that opened through the SME Exchanges has muted responses thus far. One of the key factors in the working capital cycle – credit sales suffer from payments beyond the due dates putting them in the non-performing asset (NPA) bracket – most often not on account but in spite of them. It is highly commendable that the Reserve Bank of India (RBI) has recently put out a document on the subject for comments from the public, as a sequel to the recommendations of the Committee on Financial Sector Reforms (2011-Raghuram Rajan). The issues raised are highly relevant and need resolution sooner than later. This brief only addresses the concerns raised in the document.

Having said that let me mention that in order to bind the corporates and the public sector units (PSUs) over their commitments to the MSMEs, the Companies Act 2000 has been amended to disclose all debts over Rs2 lakh in their half-yearly balance sheets. Unfortunately, neither the auditors, nor the credit rating agencies took a serious cognizance of it. Then the Canbank Factors Ltd and SBI Global Factors Ltd, were set up (1991) that had very disappointing response. Therefore, the proposal to set up a Trade Credit Exchange (TCE) where the buyers and sellers of the Bills accepted by the Financial Institutions meet to sell or buy the Bills of Exchange negotiated by the later to provide liquidity for the instrument during the tenor of the bill.

The MSME Development Act 2006 provided for arbitration and settlement processes with the State Commissioner of Industries as the Arbitrator and these have also not been able to resolve the issues either timely or to the mutual satisfaction. The main reason is that the MSMEs particularly the MSEs are in captive markets where the government departments and the PSUs even refused to accept bills that had a discount offer of 1% for prompt payment for fear of accountability and adverse comments from the Comptroller and Auditor General (CAG) eventually.

Several PSUs other than the eleven Ratnas depend heavily on budgetary grants and acceptance of memorandum of understandings (MoUs) by their related departments for honouring their purchase commitments. The state PSUs are worse still. The PSUs like the Hindustan Copper Ltd (HCL), accept goods but put payments on hold until they receive payments for their supplies. The tenor of the bills of MSMEs invariably is 60 days following the categorisation of MSME – NPAs on the threshold lines of 90 days. Therefore the question that needs to be addressed is, would the government departments and the PSUs be prepared to become the part of the TCE and conform to the trade discipline? The entire initiative now proposed would depend upon the positive response to this question.

India Inc has been having public debate on these issues and they are very likely to fall in line.

Micro and small enterprises function mostly in captive domestic unlike the medium enterprises that function both in diverse domestic and global markets. Contractual obligations therefore are more one sided and oppressive in favour of the buyer. Therefore, protection becomes imminent for the MSEs more than for the medium enterprises.

Payments and settlements between the public sector undertakings and government departments that constitute a large market for the micro and small enterprises have been very inefficient and these have been responsible for the creation of the NPAs in MSMEs. Factors did not take off. The vicious cycle of payments can be broken with only out-of-the-box solution. What the factors do basically is to create secondary market for the bills accepted by the financial institutions against goods supplied by the enterprises as part of the working capital cycle.

Additional Features to make the Secondary Markets Succeed

Government of India (GoI) can create a special fund and keep it with the two major factors –CANBANK and SBI GLOBAL Factors for the exclusive retailing to the MSMEs. This Fund should be taken recourse to by the Factors in upfront purchase of the outstanding bills beyond the agreed tenor of 60 days between the vendor and vendee when-after they can be taken to the mainstream of the factors. This would enable the free wheel of working capital to move in favour of the MSMEs.

MSME Development Act 2006 needs to be amended to make provision for the creation of such a Fund. Factors Act also needs to be amended to provide for ‘with recourse’ wheeling.

MSEs are more worried about the timely availability than cost of finance. They are not therefore so much weary about the going interest rate for working capital at 15% per annum. Even when inverse factoring takes place, if the fee plus the discounting charges of receivable factoring is retained at this rate, it would be good. But given the fact the interest and charges are outside the domain of the regulator, it depends upon how the regulator is going to enforce cost discipline to ensure that the new initiative would have many takers.

Rating institutions should be factoring the behaviour of corporates towards the MSMEs in their rating criteria as important point when there can be a modicum of compliance of the new TCE regime.

Although National Small Industries Corp Ltd (NSIC) through its vendor registration window for the SMEs has data base, the poor monitoring of payments has distanced many SMEs away. The New Exchange could have a fresh registration mandated for the Bill Trade Platform.

Pricing model options are in order although the better option would be the first one where the MSME bears the discount when the MSME seller secures immediate realisation of its bills that would allow working capital cycle undisturbed.

The secondary market should be order-based instead of auction based as the absence of bidders could spoil the broth. RBI suggested the auction-based trading.

(Dr Yerram Raju Behara is a former senior executive of SBI and former Dean of Studies at Administrative Staff College of India (ASCI). He is presently visiting Professor at Institute of Small Enterprise Development, Kochi and Advisor, KESDEE Inc, the E-Learning Centre at San Diego. The views expressed in the article are his personal.)